(Bloomberg) -- China Vanke Co. is in talks with banks on a debt swap that would help the cash-strapped developer stave off its first-ever bond default, according to people familiar with the matter.

Vanke’s major creditor banks are considering a plan to swap bond holdings worth tens of billions of yuan in principal into secured debt, the people said, asking not to be identified discussing a private matter. The swap would help China’s second-largest real estate company avoid a public default while giving banks collateral to protect against any potential losses.

The talks, coordinated by China’s financial regulators and the local government of Shenzhen, are ongoing and the plan is subject to change, the people said. Vanke didn’t respond to requests for comment. The Shenzhen government, which owns a stake in Vanke, and the National Administration of Financial Regulation didn’t respond. 

Vanke’s cash crunch has become a major focus for investors trying to gauge how much help China’s government and its banks will provide to the few remaining property giants that have so far avoided default. Vanke’s shares and bonds jumped on Tuesday amid speculation authorities would support the company, which had about 1.3 trillion yuan ($181 billion) of liabilities as of mid-2023.

Even after the rally, investors have significant doubts about Vanke’s financial health. The developer’s longer-dated dollar bonds are trading at distressed levels below 47 cents on the dollar, suggesting a high chance of default amid depressed property sales and a wobbly Chinese economy. Moody’s Ratings cut the company’s credit rating into junk territory on Monday.

Vanke is facing liquidity pressure on multiple fronts. Several insurers are seeking to protect payments on private debt issued to Vanke. At least three such firms based in Beijing sent executives to the company’s headquarters in Shenzhen recently to hammer out a plan, people familiar have said. 

Separately, Vanke has tried to ask state-backed lenders for an offshore loan. However two of those banks have yet to sign off on the HK$4.5 billion ($575 million) syndicated loan as of last week, people familiar have said. 

Moody’s said on Monday that it expected Vanke’s financial flexibility and liquidity buffer to weaken over the next 12-18 months, partly because of its declining contracted sales. The value of property sold by Vanke declined around 40% to 34.5 billion yuan in the first two months this year, after falling 10% last year, the ratings agency estimated. 

“The company’s continuing exposure to funding volatility, on top of its high refinancing needs, does not support an investment-grade rating,” Moody’s said in the report. 

Vanke will have about 14 billion yuan of offshore bonds and 20 billion yuan of onshore bonds coming due or becoming puttable through June 2025. As of September, the company had about 101 billion yuan of unrestricted cash, which covered two-times its short-term debt, Moody’s estimated. 

Founded four decades ago, the company has deep ties with the Shenzhen government. The city’s metro company, which is wholly owned by the State-owned Assets Supervision and Administration Commission of Shenzhen, is Vanke’s largest shareholder, with a stake of 27.18% as of June. 

The company had a total land bank of 107.7 million square meters in gross floor area across China’s seven major economic regions as of June, according to Moody’s. 

--With assistance from Zhang Dingmin and Emma Dong.

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